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What business structure is ideal for your business?

What business structure is ideal for your business?

While starting a new business may come with its share of thrills but it also needs its share of hard work and research. One of the most important decisions would be on the kind of business structure that would be ideal for you. Deciding on this one important aspect could make or break your business.

Here we discuss the three major kinds of business structures that exist along with their pros and cons:

1. Sole proprietorship

This is the simplest structure where a single individual owns and operates the business because of which there is no legal distinction between the owner and the business. If you are an individualistic person who likes to work alone, then this could be the ideal business structure for you.

Pros:

(i) Undivided profits belong to the sole proprietor
(ii) Tax benefits which arise from your expenses and your income from the business being included in your personal income tax return
(iii) Provides a greater amount of flexibility in the business operations and decisions
(iv) The proprietor enjoys a complete control over the business

Cons

(i) Unlimited liability for the business losses has to be borne by the sole proprietor. This could mean even the sale of personal property for the repayment of the creditors.
(ii) It is tough to convince the banks for funding since they are wary of funding sole proprietorship due to their small assets and high mortality rate
(iii) After the death of the business owner, it could be tough for the business to survive as others may not want to take up unlimited liability for it

2. Partnership

A business partnership is formed when two or more people (up to 20) start a business together. It could be of three types:

(a) General partnership: All the partners are equally responsible for the management of the business and each has unlimited liability for the debts and obligations it may incur.
(b) Family partnership: When two or more members are related to one another
(c) Limited partnership: In this structure, the liability of one or more partners for the debts and obligations of the business is limited. There is no maximum number of limited partners in this business structure.

Pros

(i) This business structure benefits from the pooling of experience, skills and assets of its members
(ii) There are certain tax benefits for family partnerships
(iii) Partnerships can be set up in an inexpensive and easy manner as compared to a corporation
(iv) Partnerships are easy to administer with profits and losses being shared by the partners depending on their business share
(v) Filing income tax returns is easy since it is the partners and not the ‘partnership’ which is taxed

Cons

(i) All partners are personally responsible for business debts
(ii) Partners become individually and collectively liable to the defaults of other partners
(iii) If a partner decides to dissolve the business, it may effectively end the business
(iv) Tax is charged individually so as the business earnings increase, so does the tax
(v) Personal differences may crop up between the partners which may be detrimental to the business
(vi) No partner has complete freedom on making business decisions and has to take approval from the other partners

3. Corporations

A corporation is a business structure, which is an independent legal entity, separate from its owners. Due to this, it requires complying with more regulations and tax requirements. It is usually suggested for large companies with multiple employees.

Pros

(i) Limited liability for each partner is the best advantage of a corporate
(ii) Banks are able to offer loans and incentives to corporations much more easily
(iii) Corporations can also raisP̿nds through selling business stocks
(iv) Corporations file taxes separately from owners which gives tax benefits to them
(v) Potential employees find it much attractive to work in a corporate

Cons

(i) A lot of money goes into starting a corporation as well a good amount of time is needed for such a venture to take off
(ii) Double taxation of corporations sometimes – firstly when the company makes a profit and secondly on the dividends paid to the shareholders
(iii) Need for increased paperwork and record keeping
(iv) More accounting and tax preparation services needed
The key, is to find the right structure for your business- as with all your decisions weigh the pros and cons before going forward.

What business structure is ideal for your business?

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